19/8/2019

Banks to retain interest rates on current loans

Kenya Bankers Association chief executive officer Habil Olaka speaks during the release of the "State of the Banking Industry Report" at Serena Hotel in Nairobi on July 9, 2019. He has said that banks are committed to maintaining the current customers’ loan contracts. PHOTO | FILE | NATION MEDIA GROUP

By PAUL WAFULA

In Summary

The law, which came as a relief to many bank customers, ended the era of expensive loans, which had seen commercial banks make billions of shillings.

The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

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Commercial banks will not adjust the interest rates on loans already taken after the law capping interest rates is repealed.

In the biggest concession yet to Parliament in a bid to scrap the interest rate capping law, lenders, through the Kenya Bankers Association (KBA), the sector lobby group, offered not to increase interest rates on current loans, as has been the practice in the past.

Instead, only new borrowers will pay the new rates in line with their risk profile.

“Banks are committed to maintaining the current customers’ loan contracts within the existing contractual framework,” the memorandum signed by KBA Chief Executive Officer Habil Olaka says.

The memorandum has been sent to Parliament as part of the submissions for the finance bill, through which the National Treasury seeks to do away with the interest rate capping law.

“It is only new loan contracts that will be risk-prized post the repeal of the interest rate capping law,” Mr Olaka added.

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Commercial banks have in the past two years put up a spirited fight to reverse the interest rate capping law sponsored by Kiambu MP Jude Njomo.

The law, which came as a relief to many bank customers, ended the era of expensive loans, which had seen commercial banks make billions of shillings through charging high rates.

They were charging as high as 21 per cent for non-secured loans, but paying peanuts for deposits. But the law introduced on September 2016 brought these excesses to an end after it capped lending rates to four percentage points above the Central Bank Rate (CBR).

The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

But banks argue that the law has not achieved its intended purpose since it ended up denying small businesses access to credit.